Bond LIquidity And Yields

Many observers believe that the Federal Reserve may increase interest rates in December. According to a recent article, that could be the worst time for the bond market. During December, bond trading slows dramatically as banks clean up balance sheets in preparation for year-end stress tests. As a result, banks are less likely to enter into large trades. Strategists at RBC Capital Markets argue that the large jump in yields on bonds in late September was due to the lack of liquidity in the bond market because of banks preparing for quarterly reporting. If this is true, an increase in interest rates by the Federal may result in larger increases in bond yields than might be expected due to lack of liquidity, at least temporarily.     

Startup Investing Expanded

Yesterday, the Securities and Exchange Commission approved Title III of the 2012 Jumpstart Our Business Startups Act (JOBS Act). Title II of the JOBS Act, which was approved in in 2013, allowed accredited investors to in startups. The approval of Title III allows anyone to invest in startups, small businesses, and real estate through crowdfunding. The total amount of investment in such ventures is limited to 5 or 10 percent of the investors annual income, which provides protection to small investors from themselves. But, it does allow small investors into startups, which can provide very high returns. However, before you make these investments, remember the lessons from Chapters 12 and 13: The only way to increase your return is to increase the level of risk you take. 

Robert Schiller Examines Your Weaknesses

In a recent interview, Nobel Laureate Robert Schiller discusses how companies can mislead consumers and how the media latches on to smalls stories. His comments are based on human behavior, which is the basis for behavioral finance. His last comments are a very interesting take on investing: "We don't know the probabilities of future events. Still, you have to take action and so you do it on gut feeling. That's the world we live in. There's so much disagreement about investing, and it's because nobody really knows." Interestingly, although we greatly respect Dr. Schiller, he is still guilty of making his own market predictions.

Cat's Good Bad News

Caterpillar Inc., announced lower quarterly profits and that it expected sales in 2016 to decrease 5 percent, the company's 4th consecutive yearly sales decline. On this announcement of seemingly bad news, the stock was up as much as 5.7 percent on the day. So why was the stock price up today? The news in the announcement today was consistent with the company's warning last month.

Negative U.S. Interest Rates?

Back in March, we posted about negative interest rates in Europe. And while recent speculation has centered on the Federal Reserve increasing interest rates, at least one member of the Fed has pushed for negative interest rates. Narayana Kocherlakota, president of the Minneapolis Fed, has advocated for the Federal Reserve implementing negative interest rates in the U.S. Although Kocherlakota is a non-voting member of the Fed, he has been joined by other Fed officials arguing for negative interest rates. An extra mattress for your savings account is looking more appealing.

Ferrari Strong Off The Line

Ferrari stock was strong off the line on its IPO. The company's stock, which was priced at $52 in the IPO opened at $60, a 15.4 percent price jump, before closing at $55, a 9.5 percent price increase. The company raised $893 million in its IPO, which could increase to $982 million if the Green Shoe option is exercised. 

Buybacks Hit $600 Billion

S&P companies have announced about $600 billion in stock buybacks this year. A major reason for the high level of buybacks is the low interest rate. The dividend payout ratio for blue chip companies is about 3 percent, but the same company can borrow at about 2.2 percent. This means that it is actually cheaper to buy back stock with borrowed money as this will save the company .8 percent per year. Of course, there is a widespread belief that the Federal Reserve will raise interest rates soon, which will lessen the appeal of buybacks funded with new borrowing.